The inflation problem will get better before it gets worse

In 1978 milton friedman looked back at three recessions that had struck America’s economy over the preceding decade. “Each scenario has been the same,” he wrote. Loose money created a boom and then inflation. An outcry against rising prices led to higher interest rates and a recession, only for rising unemployment to catch more public attention. So economic policy turned stimulatory. Just as inflation began to fall, another boom kicked off. The inflationary cycle began again.

The world economy is now in the early stages of Friedman’s loop. Inflation has played havoc with central banks’ credibility and crushed consumer confidence. In Europe high gas prices will cause economic turmoil this winter; consumers are more miserable even than during the financial crisis. In Asia, which seemed immune to the inflation bug, dearer oil and falling currencies have forced central banks to raise interest rates. Policymakers are now focused on a single enemy: rising prices. The issue is whether they will hold their nerve as monetary hawkishness takes its toll.